YESTERDAY’S job cuts at Deutsche Bank may have come as a shock, but – unfortunately for the bank’s new co-chief executives – they were inevitable.
Compared to its peers Deutsche’s core Tier 1 ratio is weak, and though management promised yesterday that improving ratios was a key focus, it is still targeting just eight per cent by the end of next year. Short of tapping investors for cash, which the bank has vowed not to do, the only way it’ll boost the buffers is by making cuts.
And when investment banking is by far the biggest drag on profits, it’s no surprise that the department is the most obvious target.
It might have been allowed a little more breathing room had margins not been quite so terrible – but revenues fell by 11 per cent, and pre-tax profit plummeted by almost two-thirds. With a cost-to-income ratio of 87 per cent and an evaporating deal flow, corporate banking stood little chance of fighting its corner.
Of course it’s not just Deutsche Bank feeling the heat. Banks on both side of the Atlantic have already made sure we’re well prepared for a summer of cuts, with Morgan Stanley planning 700 layoffs and Bank of America and Credit Suisse both committing to massive cost saving. Pay is also being slashed.
Meredith Whitney, the well-known US analyst, even said yesterday that Wall Street could cut as many as 50,000 more jobs this year.
Just like when Whitney was one of the first to predict the subprime crisis, nobody really wants to believe her. But with capital ratios in focus and no sign of a market recovery on the horizon, we don’t think many bank chiefs would dare to disagree. The next few months are going to be tough for the City.
Elizabeth Fournier is City A.M.’s news editor @ej_fournier